Global Regulatory Developments in Investor Protection - May 2018 - IFIC.ca
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Global Regulatory Developments in Investor Protection May 2018
OVERVIEW Securities regulators in Canada and around the world have increased their focus in recent years on regulatory reforms to improve investor protection. These deliberations have led to a growing interest in how to address potential conflicts of interest in the sale of retail investment products. There is no consensus on how to deal with potential conflicts. Approaches range from imposing a statutory best interest or fiduciary duty on advisors, to enhancing transparency and disclosure, to improving advisor proficiency and, in the most extreme cases, to banning embedded commissions. This document tracks major regulatory initiatives and associated impacts in 16 key international markets. It will be updated periodically to reflect ongoing developments. TABLE OF CONTENTS Summary����������������������������������������������������������������������������������������������������������������������������������������1 Australia���������������������������������������������������������������������������������������������������������������������������������������� 3 Canada�������������������������������������������������������������������������������������������������������������������������������������������4 Denmark����������������������������������������������������������������������������������������������������������������������������������������5 European Union��������������������������������������������������������������������������������������������������������������������������6 Germany���������������������������������������������������������������������������������������������������������������������������������������� 7 Hong Kong������������������������������������������������������������������������������������������������������������������������������������8 India�������������������������������������������������������������������������������������������������������������������������������������������������9 Ireland������������������������������������������������������������������������������������������������������������������������������������������ 10 Japan��������������������������������������������������������������������������������������������������������������������������������������������� 11 Netherlands�������������������������������������������������������������������������������������������������������������������������������� 12 New Zealand������������������������������������������������������������������������������������������������������������������������������ 13 Singapore������������������������������������������������������������������������������������������������������������������������������������ 15 South Africa�������������������������������������������������������������������������������������������������������������������������������� 16 Sweden����������������������������������������������������������������������������������������������������������������������������������������� 17 United Kingdom������������������������������������������������������������������������������������������������������������������������ 18 United States���������������������������������������������������������������������������������������������������������������������������� 20 Banning Embedded Commissions Around the World������������������������������������������������� 21
1
Summary
The most common approaches that have been pursued to enhance investor protection and
address potential conflicts of interest include enhanced disclosure, targeted reforms to improve
the advisor-client relationship, imposing a statutory best-interest standard or fiduciary duty on
advisors, and in select jurisdictions, banning embedded commissions.
Across jurisdictions, there are inconsistencies in the types of products being regulated, with
some jurisdictions imposing restrictions just for investment products, while other jurisdictions
address virtually all deposit, insurance, investment, mortgage and other commission-driven
products.
Different jurisdictions have approached the issue of potential conflicts of interest in different
ways and there is no single regulation that effectively addressed these concerns in their entirety.
However, the detailed analysis by country on the following pages reveals a number of significant
trends:
1. Few jurisdictions have banned embedded commissions
The most extreme measure – banning embedded commissions – has been evaluated by
securities regulators in many jurisdictions. Only four (Australia, the Netherlands, the United
Kingdom and South Africa) have taken action or opted to proceed.
Securities regulators and governments in other countries, including Denmark, European
Union, Germany, Hong Kong, India, Ireland, New Zealand, Singapore, Sweden, Switzerland,
and the U.S., have examined this option and explicitly ruled out a total ban on embedded
commissions. Other countries have examined regulatory responses to conflicts of interest
more broadly and have decided to continue to allow for the use of embedded commissions.
While Europe, through the Markets in Financial Instruments Directive II (MiFID II), prohibits
independent advisors from accepting commissions, the independent advice channel is one
of the smallest channels in the European funds industry, representing just 11% of assets. The
vast majority of fund sales are made through banks, where the MiFID II prohibition does not
apply.
In all, only 13% of total worldwide mutual fund assets of $49.3 trillion are covered, or slated to
be covered, by a ban on embedded commissions.
Global Regulatory Developments in Investor Protection (May 2018)2
Summary
2. Even fewer jurisdictions have created a fiduciary or best interest standard
Australia is the only country that has adopted a broad statutory best interest standard for
advisors in the sale of retail funds.
In the U.S., the Department of Labor (DOL) has adopted a rule that expands the definition
of “fiduciary” under the Employee Retirement Income Security Act by requiring investment
advisers who provide advice to retirement accounts—including broker-dealers and insurance
agents—to abide by a fiduciary standard. Full implementation of all elements of the rule -
which faces legal challenges – has been pushed to July 1, 2019.
3. Enhanced disclosure is the favoured regulatory option in most jurisdictions
The majority of markets have made enhanced disclosure a key element of newly developed
financial principles and policies. The majority of disclosure has come in the form of detailed
information on fees and commissions to improve transparency.
4. Early evidence tells cautionary tale
Most of the foreign regulatory changes are recent with little independent research available
to evaluate their impact. However, early evidence can serve as a guide to other regulators
that are considering similar changes. In the U.K. for example, while the quality of investment
advice is considered to be improved, there is strong evidence of an advice gap without
any clear evidence of a reduction in “mis-selling” incidents or a reduction in total costs to
investors.
Global Regulatory Developments in Investor Protection (May 2018)3
Australia
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Integrated – Australia Securities
and Investments Commission (ASIC) – supervision
of securities, derivatives, general and life insurance,
Fiduciary
superannuation, margin lending, carbon units, deposit
Duty/ Best
Interest accounts and means of payment facilities
Standard The Australian Government introduced ‘Future
of Financial Advice’ (FoFA) reforms in 2012, with
compliance beginning in 2013. Reforms include:
• A ban on conflicted remuneration structures
including commissions and volume based payments
in relation to the distribution of and advice on a
range of retail investment products but excluding life
insurance;
Enhanced
YES Disclosure • A duty for financial advisers to act in the best
interests of their clients;
• An opt-in obligation that requires advice providers to
renew their clients’ agreement to ongoing fees every
two years; and
• An annual fee disclosure statement requirement
showing the amount of fees paid by the client, the
services that they were entitled to receive, and the
services that they did receive.
Targeted These reforms are currently applicable to all financial
Reforms products except life insurance; however, ongoing
governmental and regulatory inquiry and action may
result in removing or limiting the exception of life risk
insurance products from the conflicted remuneration
ban.
IMPACTS
Australia is undertaking Post-Implementation Review of certain elements of Future of Financial Advice (FoFA)
reforms. However, potential negative impact on savings and advice is limited as Australia’s fund industry is
underpinned by Australia’s government-mandated retirement scheme (superannuation), which requires all
employers to make tax-deductible superannuation contributions on behalf of their employees (9.5% of wages).
Global Regulatory Developments in Investor Protection (May 2018)4
Canada
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Non-Integrated – Securities
regulation is separate from banking and insurance
regulation and is done at the provincial and territorial
level. The 13 securities regulators (10 provincial and 3
Fiduciary territorial) cooperate through the Canadian Securities
Duty/ Best Administrators (CSA).
Interest
Standard In Canada, regulatory changes have focused on
improved transparency and disclosure. The Canadian
Securities Administrators (CSA) have enhanced point
of sale disclosure and the annual reporting of fees and
performance. Starting in 2017, investors began receiving
annual statements showing, in dollar terms, the fees
associated with distribution and advice related to their
accounts and the annual return of their investments
on a dollar-weighted basis. The CSA is engaged in a
multi-year research project to examine the impact of
these changes on firm practices, product sales, fees
and performance, distribution trends, as well as investor
Enhanced
NO
Disclosure knowledge and behavior. Early survey research by
the CSA, the British Columbia Securities Commission
and Pollara have found increased awareness of
fees following the first delivery of enhanced annual
disclosure statements and indicators of behaviour
change.
The CSA is also planning to publish rule proposals
aimed at improving the client/advisor relationship
through targeted reforms, including to address conflicts
of interest, know your client, know your product,
suitability and relationship disclosure.
Targeted The CSA has also consulted and may issue future guidance
Reforms or rules on a potential regulatory best-interest standard.
Finally, the CSA has also consulted on banning embedded
commissions and is expected to issue an orientation paper
in 2018 that will provide guidance on the CSA’s planned
direction.
Global Regulatory Developments in Investor Protection (May 2018)5
Denmark
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Integrated – The Danish Financial
Supervisory Authority is responsible for regulation,
supervision and collecting statistics from financial
Fiduciary sector participants. These include banks, stock
Duty/ Best exchanges, securities and money market brokers,
Interest clearing and registration organizations, insurance
Standard companies, pension funds, insurance brokers,
investment companies and investment associations.
• Regulators have assessed and rejected a total ban
on commissions.
• Denmark abides by MiFID II but will not “gold- plate”
the rules.
NO
Enhanced
(beyond MiFID
Disclosure
requirement)
Targeted
Reforms
KEY REFERENCE
Denmark will not gold-plate MiFID II inducement rules by David Ricketts, Ignites Europe. Published February 4, 2016.
Global Regulatory Developments in Investor Protection (May 2018)6
European Union
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Non-integrated – European Securities
and Markets Authority (ESMA) – Provides only securities
supervision at EU level but rules must be implemented at
Fiduciary state level.
Duty/ Best
Interest MiFID provides, as a high-level principle that, when providing
Standard investment services to professional clients and retail
clients, a firm must act honestly, fairly and professionally in
accordance with the best interests of its client.
The major regulatory changes in the EU are related to MiFID
II. The aim of MiFID II is to harmonize regulation for all
financial services across the 28 member states.
The rules prohibit independent advisors and portfolio
managers (independent distribution represents
Enhanced
Disclosure approximately 11% of the European fund industry) from
accepting and retaining commissions, unless they are minor,
PARTIAL non-monetary benefits (e.g. hospitality of a reasonable
de minimis value). Advisors that are not independent are
permitted to receive fees and commissions from third parties.
MiFID II also builds on the provisions of MiFID I related
to the best interests of the client, by requiring product
manufacturers to ensure that investment products are
‘consistent with the needs’ of identified target markets.
MiFID II also empowers regulators to ban specific products,
services or practices where there are significant investor
protection concerns or a threat to financial markets.
Targeted
Reforms MiFID II greatly expands disclosure rules that were started in
MiFID I. MiFID II requires that all costs and related charges
must be shown to investors, including information relating to
investment services, the cost of advice, and the cost of the
financial instrument.
MiFID II came into force January 3, 2018.
IMPACTS
The independent advice channel is one of the smallest channels in the European fund industry (representing 11%
of industry assets) and will potentially be most affected by the inducement ban.
Global Regulatory Developments in Investor Protection (May 2018)7
Germany
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Integrated – Federal Financial
Supervisory Authority (BaFin) – Objective is to
ensure the proper functioning, stability and integrity
of the German financial system, including banking,
Fiduciary
insurance and securities.
Duty/ Best
Interest
Through a series of reforms in 2012 and 2014, Germany
Standard
has adopted rules to raise standards for advisors,
enhance fee and commission disclosure, and create a
separate designation for fee-based
advisors.
The German securities regulator, BaFin, has indicated
that it does not intend to ban embedded commissions
and will not go beyond MiFID II requirements in
regulating fees.
NO Enhanced
(beyond MiFID Disclosure
requirements)
Targeted
Reforms
Global Regulatory Developments in Investor Protection (May 2018)8
Hong Kong
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Non-integrated – Securities and
Futures Commission (SFC) regulates securities and
futures markets only.
Fiduciary
Duty/ Best After reviewing global regulatory initiatives and
Interest impacts and conducting its own research, the SFC
Standard determined that it would rule out banning embedded
fees and would focus on enhanced disclosure and
targeted reforms. In its consultation paper, it writes:
“Whilst a pay-for- advice model may eliminate the
inherent conflict of interest in receiving benefits from
product providers in the sale of investment products
to clients, it may have unintended consequences.
For instance, an “advice gap” may have emerged in
jurisdictions adopting a pay-for-advice model where
Enhanced investors who are without the resources to pay for
NO Disclosure are unwilling to pay for advice for any reason could
be left with no or very limited access to investment
products”.
The SFC’s proposed amendments:
• Governing the conduct of intermediaries when
representing themselves as “independent” or as
providing “independent advice”; and
• Enhancing the disclosure of monetary benefits
Targeted received or receivable that are not quantifiable
Reforms prior to or at the point of entering into a
transaction
KEY REFERENCE
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=16CP5
Global Regulatory Developments in Investor Protection (May 2018)9
India
Ban on Major
Embedded Regulatory Yes/No Recent Development
Commissions? Initiatives
Regulatory Status: Non-integrated – Securities and
Exchange Board of India (SEBI) – Regulates only
securities.
Fiduciary
In August 2009, the Securities & Exchange Board of
Duty/ Best
India (SEBI) banned front-end load fees for all mutual
Interest
fund schemes. Also in India, the total expense ratio
Standard
(TER) that can be charged to a scheme is capped at
2.5% (equity funds), 2.25% (debt funds), 2.5% (fund of
funds), and 1.5% (ETFs and Index Funds).
In the fall of 2016, SEBI issued a consultation where
it proposed preventing mutual fund “distributors”
(mutual fund sales agents) from providing incidental
or basic investment advice with respect to mutual fund
products. The consultation states that “if they want
to engage themselves in providing incidental or basic
investment advisory services on mutual fund products,
Enhanced
NO Disclosure they need to register themselves as an investment
adviser under IA Regulations.” Currently, fewer than
1,000 investment advisers are registered with SEBI
and the vast majority of fund sales are done through
“distributors”. In January 2018, SEBI issued a follow-up
consultation revising its earlier proposal to continue to
allow “distributors” to provide limited forms of advisory
services, including risk assessments and asset-
allocation.
In 2016, SEBI enhanced disclosure rules requiring
absolute amounts of commissions to be disclosed
in semi-annual consolidated account statements
Targeted provided to investors.
Reforms
Global Regulatory Developments in Investor Protection (May 2018)10
Ireland
Ban on Major
Embedded Regulatory Yes/No Recent Development
Commissions? Initiatives
Regulatory Status: Integrated – The Central Bank of
Ireland is Ireland’s central bank and serves as the
country’s financial services regulator.
Fiduciary
Duty/ Best In November 2017, following a consultation period,
Interest the Central Bank confirmed that it would continue
Standard to allow embedded commissions provided they are
properly disclosed.
Also in November 2017, the Bank released a
consultation on proposals to enhance investor
protection when embedded commissions are used.
The proposals include increasing transparency
where commissions are used, greater mandated
No clarity around which intermediaries are independent
(beyond MiFID and, various amendments to conflict of interest
Enhanced
requirement) provisions, including:
Disclosure
• Inducements linked to targets that do not
consider the consumer’s best interests (e.g.,
targets linked to volume, profit or business
retention);
• Inducements linked to the size of a mortgage
loan;
• Soft commission; and
• Recommendations where a conflict of interest
Targeted
Reforms arises.
KEY REFERENCE
http://www.irishtimes.com/business/personal-finance/central-bank-may-curb-broker-commissions-1.2519495
https://www.centralbank.ie/news/article/responses-to-discussion-paper-on-the-payment-of-commission-to-
intermediaries
https://www.centralbank.ie/docs/default-source/publications/Consultation-Papers/cp116/cp116-intermediary-
inducements---enhanced-consumer-protection-measures.pdf?sfvrsn=2
Global Regulatory Developments in Investor Protection (May 2018)11
Japan
Ban on Major
Embedded Regulatory Yes/No Recent Development
Commissions? Initiatives
Regulatory Status: Integrated – Financial Services
Agency (FSA) is responsible for insurance, banking,
and securities.
Fiduciary
On January 19, 2017, the FSA released a draft of its
Duty/ Best
Principles for Customer-Oriented Business Conduct
Interest
applicable to financial firms operating in Japan. Firms
Standard
are expected to adopt the seven principles and to
demonstrate how they are implementing or “absorbing
the spirit” of the principles.
The seven principles require firms to:
• Establish and publish a clear policy for the
implementation of client-oriented business
conduct;
• Demonstrate a high level of expertise and
Enhanced professional ethics and operate in the best interest
NO Disclosure of their clients;
• Accurately monitor potential conflicts of interest
with their clients;
• Provide detailed information regarding
commissions and fees to be borne by clients;
• Provide clients with easy to understand
information relating to sales and recommendations
of financial products and services;
• Provide suitable services to clients in the creation,
sale, and recommendation of the financial
products; and
Targeted • Adopt remuneration and performance evaluation
Reforms systems that encourage employees to act in the
best interest of clients.
Global Regulatory Developments in Investor Protection (May 2018)12
Netherlands
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Integrated – Dutch Authority for the
Financial Markets (AFM) – Supervises the conduct of
the entire financial market sector: savings, investment,
insurance and loans.
Fiduciary
Duty/ Best In January 2014, the Dutch Authority for Financial
Interest Markets (AFM) placed a ban on all commissions paid
Standard by a product issuer to an advisor relating to advice.
The ban applies to virtually all investment, insurance
(except property and casualty insurance), and mortgage
products. The ban was triggered by high-cost insurance
policies that were mis-sold to consumers. Today, clients
must pay directly for individual portfolio management,
investment advice and execution-only services.
In addition to these reforms, enhanced disclosure
rules were adopted that require a summary disclosure
document to be provided to investors prior to sales,
showing fees, type and scope of advice.
Enhanced
YES
Disclosure
While there has been some observation of a
consolidation in the industry and a potential advice gap,
a full and systematic assessment of the impact of the
ban was planned for 2017 but has not been published.
Targeted
Reforms
Global Regulatory Developments in Investor Protection (May 2018)13
New Zealand
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Integrated – Financial Markets
Authority (FMA) – An integrated market conduct
regulator providing regulation of securities, savings
schemes and insurance sales.
Fiduciary
Duty/ Best The Ministry of Business, Innovation and Employment
Interest (MBIE) completed a review of the financial advice industry
Standard in 2016.
The government has approved a package of changes that
includes:
• Simplifying the regime;
• Establishing an even playing field with more
proportionate regulatory requirements;
• Replacing current adviser designations;
• Improving consumer understanding through
Enhanced disclosure and client care;
NO Disclosure
• Enabling lower cost fit for purpose licensing; and
• Requiring businesses to have a stronger connection to
New Zealand for registration on the Financial Service
Providers Register.
There will be a universal obligation on all those providing
financial advice to put the interests of the consumer first.
Currently only some advisers have this obligation. The
consumer-first obligation will be supported by the FMA
monitoring and enforcement, where any breaches of the
obligation could be penalized.
Targeted
Reforms
Global Regulatory Developments in Investor Protection (May 2018)14
New Zealand, cont.
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
The MBIE evaluated the option of banning commissions
but determined that it would not be a “silver bullet” to
improve the quality of advice, for the following reasons:
Fiduciary • Commissions are not themselves harmful. They are a
Duty/ Best means of funding the distribution cost of the adviser
Interest channel. There is a risk that banning commissions in
Standard New Zealand would further limit access to advice.
• A ban on commissions would not directly target poor
conduct, as the FMA noted in its recent review of
insurance replacement business that many advisers
do not have high replacement business despite being
paid on commission structure.
• It would not address conflicts of interest where
financial products are sold through in-house
distribution channels, such as bonuses or sales
targets.
Enhanced • The proposals represent a more prudent approach in
NO Disclosure the first instance.
In December 2017, the Financial Services Legislation
Amendment Bill had its first reading. This Bill gives effect
to the new regulatory regime for financial advice and has
been referred to the Economic Development, Science and
Innovation Select Committee.
Targeted
Reforms
Global Regulatory Developments in Investor Protection (May 2018)15
Singapore
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Integrated – Monetary Authority
of Singapore (MAS) – An integrated supervisor,
overseeing all financial institutions in Singapore
Fiduciary
– banks, insurers, capital market intermediaries,
Duty/ Best
Interest financial advisors and the stock exchange.
Standard
Singapore undertook a comprehensive review of retail
investment industry in 2012 and ruled out placing a
ban or cap on commissions. As stated by Lee Chuan
Teck, chairman, Financial Advisory Industry Review
Panel and assistant managing director, MAS “…it was
not clear that fees would necessarily be cheaper than
commissions. In fact, it was more likely that customers
with smaller investments ended paying more.”
Enhanced
NO Disclosure Reforms have focused on professional standards in the
financial advisory industry, improved efficiency in the
distribution of life insurance and investment products,
and disclosure.
In January 2015, MAS introduced a balanced scorecard
(BSC) remuneration framework to promote a culture
of fair dealing. Under the BSC framework, a significant
proportion of a representative’s remuneration will be
dependent on whether the representative has taken
Targeted steps to understand the customer’s needs, recommend
Reforms suitable products, make adequate disclosures and
conduct him/herself professionally.
KEY REFERENCES
http://www.mas.gov.sg/news-and-publications/speeches-and-monetary-policy-statements/speeches/2013/
presentation-of-financial-advisory-industry-review-panel-report.aspx
http://www.mas.gov.sg/annual_reports/annual20142015/chapter_3/financial_advisory_industry_review.html
Global Regulatory Developments in Investor Protection (May 2018)16
South Africa
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Non-integrated – Financial Services
Board (FSB) oversees the non-banking financial
services industry, which includes insurance, securities,
Fiduciary
and financial advisors and brokers.
Duty/ Best
Interest
In November 2014, the FSB put forward 55 Retail
Standard
Distribution Review regulatory proposals that affect
market conduct regulation. Implementation was planned
in three phases, beginning in early 2017. Updates have
not been provided.
The prohibition of product supplier commissions on
investment products and insurance products was to
be implemented in two phases, expected in 2017: the
first phase will relate to lump sum investments and
Enhanced
Disclosure the second phase will impact recurring contribution
investments.
YES
Commissions will still be permitted for recurring
contribution investment (savings) products sold in the
low-income sector.
FSB will consult on allowing a level of commission to still
be available for compulsory annuities below a purchase
price threshold.
In addition to the ban on commissions, the FSB
Targeted is enhancing disclosure rules related to fees and
Reforms remuneration, and requiring that advisors are designated
as tied “product supplier agents” or as “registered
financial advisors”.
KEY REFERENCE
https://www.fsb.co.za/NewsLibrary/FSB%20Retail%20Distribution%20Review%20Status%20as%20at%20
December%202016.pdf
Global Regulatory Developments in Investor Protection (May 2018)17
Sweden
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Integrated – Finansinspektionen
Fiduciary
– The financial supervisory authority whose role is
Duty/ Best
to promote stability and efficiency in the financial
Interest
system, as well as to ensure effective consumer
Standard
protection. It supervises insurance, investment funds,
banks, securities and intermediaries.
In February 2016, Finansinspektionen published a
report on a review of the Swedish savings market.
Enhanced
Disclosure While conflict of interest was identified as a concern in
embedded fee arrangements, the Swedish minister for
NO financial markets and consumer affairs
(beyond MiFID issued a statement saying that the government will not
requirement) proceed with the proposal on a ban that goes further
than the MiFID II rules. Enhanced disclosure and
targeted reforms have been implemented as required
by MiFID II rules (see EU section).
Targeted
Reforms
IMPACTS
Unlike countries such as the U.K., Canada, and the U.S., there are very few independent financial advisors in
Sweden; most advisors operate within banks and insurance companies.
KEY REFERENCES
http://www.investmenteurope.net/regions/swedendenmarkfinlandnorway/swedish-government-proposes-
not-ban-commission-led-sales/
ht tp://w w w.regeringen.se/rat tsdokument/lagradsremiss/2017/01/nya-regler-om-marknader-for-
finansiellainstrument-mifid-ii-och-mifir/
Global Regulatory Developments in Investor Protection (May 2018)18
United Kingdom
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Integrated – Financial Conduct
Authority (FCA) – Supervises securities, banking,
insurance and intermediaries.
Fiduciary FCA introduced the Retail Distribution Review (RDR)
Duty/Best reforms at the end of 2012. The reforms raised the
Interest minimum level of adviser qualifications, improved the
transparency of charges and services and removed
Standard
commission payments to advisers and platforms from
investment products. The ban does not apply to term life
insurance products and other protection products.
The RDR also requires vertically integrated firms to ensure
that the charges for advice cover the costs of providing
that advice, and that the firm does not unreasonably
cross-subsidize these costs from other areas of the value
chain, such as their products.
FCA rules require firms to “act honestly, fairly and
professionally in accordance with the best interests of
Enhanced clients.”
YES
Disclosure
In response to an identified advice gap, U.K. Treasury and
FCA launched a Financial Advice Market Review (FAMR).
The FAMR report contained the following findings:
• Major improvements to the quality of financial advice,
driven by the RDR and other regulatory initiatives,
have raised standards of professionalism and
enhanced consumer protection.
• While quality has improved, accessibility has been
reduced – the high standard of advice is primarily
accessible and affordable only for the more affluent.
• There are many consumers who are discouraged by
Targeted the high cost advice.
Reforms • According to one survey, 69% of advisers had turned
away potential clients over the last 12 months, with
most stating that the advice services offered would
not have been economic given the circumstances of
those clients.
Global Regulatory Developments in Investor Protection (May 2018)19
United Kingdom, cont.
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
• A survey of advice firms suggested that the proportion
of firms who only take on clients with a minimum
portfolio of more than £100,000 has more than doubled
over the previous two years – from around 13% in 2013
Fiduciary to 32% in 2015.
Duty/Best • The FCA’s own survey of advisers found that 45% of
Interest firms rarely provide retirement income options advice to
Standard customers with less than £30,000 to invest.
• The number of advisors dropped 25% from about
40,000 in 2011 to about 30,000 in 2014.
The FAMR led the U.K. Treasury to state that “the Financial
Advice Market Review found that there is an ‘advice gap’ for
retirement advice for people without significant wealth.”
Chief Executive of the Financial Conduct Authority Andrew
Bailey stated that FAMR found that, “affordability of
advice was a barrier to the less well-off. Full, face-to-face
advice can be expensive and not always cost-effective for
consumers, particularly those with small amounts of money
Enhanced
YES
Disclosure or simpler needs.”
The FCA also conducted an Asset Management Review in
2017 and in April 2018 provided a list of rules in response to
the review, including:
• A requirement for fund managers to make an annual
assessment of value, as part of their duty to act in the
best interests of the investors in their funds
• A requirement for fund managers to appoint a minimum
of two independent directors to their boards
• New responsibilities to:
(i) improve fairness around the way in which fund
Targeted managers profit from investors buying and selling their
Reforms funds
(ii) facilitate the movement of investors into cheaper
share classes
Global Regulatory Developments in Investor Protection (May 2018)20
United States
Ban on Major
Embedded Regulatory Yes/No Recent Developments
Commissions? Initiatives
Regulatory Status: Non-integrated – Securities regulation
and market conduct supervision is split between agencies
and not inclusive of banking and insurance.
Fiduciary
Duty/ Best
Interest Embedded commissions are not banned in the United States
but it is a jurisdiction where market forces and choice have
Standard led the vast majority of fund sales to be made through
unbundled fee structures.
The U.S. Department of Labor’s fiduciary rule expanded the
“investment advice fiduciary” definition under the Employee
Retirement Income Security Act of 1974 (ERISA).
Under the rule, advisors who provide fiduciary investment
advice are not permitted to receive payments (embedded
Enhanced commissions) creating conflicts of interest without a specific
Disclosure prohibited transaction exemption.
The rule was partially implemented in June 2017 but
not enforced, with the balance originally scheduled for
NO implementation July 2019.
Industry initiated legal challenges to the DOL rule have
been adjudicated. Of particular note, the U.S. Court of
Appeal 5th Circuit struck down the DOL Fiduciary Rule. In
their decision, the Court of Appeal noted the withdrawal
of several major companies from some segments of the
brokerage and retirement investor market. The court
observed that many investors with small accounts
prefer commission-based fees and “it is likely that
Targeted many financial service providers will exit the market
Reforms for retirement investors rather than accept the new
regulatory regime”.
Global Regulatory Developments in Investor Protection (May 2018)21
Banning Embedded Commissions Around the World
The previous sections of this report provide detailed information about how 16 countries are addressing conflicts of
interest through a range of policy options, including enhanced disclosure, targeted reforms, a best-interest standard
or fiduciary duty for advisors, and banning embedded commissions. This section provides a focus on embedded
commissions.
Looking at 22 countries around the world, only four have opted to ban embedded commission; many have explicitly
ruled out this option. In all, only 13% of total worldwide mutual fund assets of $49.3 trillion are covered, or slated to
be covered, by a ban on embedded commissions.
ALLOWS FOR EMBEDDED COMMISSIONS
Canada Belgium Denmark ‡ European Union * France Germany ‡
Hong Kong ‡ India ‡ Ireland ‡ Israel Italy Japan
New Zealand ‡ Singapore ‡ South Korea Sweden ‡ Switzerland ‡ United States ‡
BANNED EMBEDDED COMMISSIONS
Australia Netherlands South Africa United Kingdom
*The EU’s MIFID II reforms only apply to commissions paid to independent financial advisors, who represent only 11% of the European market.
‡Have explicitly consider implementing a total ban on embedded commissions and decided not to, mostly out of a concern of access to advice.
Global Regulatory Developments in Investor Protection (May 2018)22
About The Investment Funds
Institute of Canada
The Investment Funds Institute of Canada (www.ific.ca) is
the voice of Canada’s investment funds industry. IFIC brings
together 150 organizations, including fund managers and
distributors, to foster a strong, stable investment sector
where investors can realize their financial goals. The
organization is proud to have served Canada’s investment
funds industry and its investors for more than 50 years.
For more information about Global Regulatory Developments in Investor
Protection May 2018, contact: Ian Bragg, ibragg@ific.ca, 416-309-2325
Global Regulatory Developments in Investor Protection (May 2018)The Investment Funds Institute of Canada 11 King Street West, 4th Floor Toronto, ON M5H 4C7 IFIC.CA
You can also read
